Solving The Foreclosure Crisis Essay

1191 words - 5 pages

The foreclosure crisis was caused by a pattern of risky investments by the leading United States banks that put the short term pursuit of profit above the long term interests of homeowners. This unquenchable desire for short-sighted quarterly profits, oblivious to long-term risk, motivated the decision of some banks to begin offering adjustable rate mortgages. These banks lured honest homeowners with low adjustable interest rates that were at serious risk to rise precipitously if short-term interest rates reverted to historic levels. The established government policy of stressing homeownership that was supported by Reagan, Clinton, and both Bush administrations heavily incentivized purchasing homes. The combination of low interest loans and government incentives produced a dramatic rise in homeownership that was unsustainable. People who could put down only a small amount of capital on their homes were allowed to buy homes. The spike in house purchases and adjustable rate loans created a housing bubble. This bubble burst once housing prices plummeted and interest rates began to climb. The housing bubble directly caused the foreclosure crisis by trapping homeowners with mortgages that were larger than the value of their homes. Homeowners were faced with impossible monthly payments and no means to refinance and were therefore left with no recourse they were forced to foreclose.
Actions to fix the foreclosure crisis must be directed towards outlawing the risky banking policies such as adjustable rate mortgages. Adjustable rate mortgages are part of a larger shift in modern business practices towards exploiting rather than serving the customer. This mentality causes service providers to trick their patrons by offering deals that look appealing, but have hidden catches that are designed to milk the customer for all they are worth. Adjustable rate mortgages are the most odious example of customer exploitation. Honest Americans trying to live the dream of homeownership that has been constantly pushed by the government as a right were deceived into buying mortgages that had adjustable interest rates. In order correct this problem the government must work to bring the interests of the banks back into line with the interests of their customers. The government could accomplish this by enacting legislature that outlaws granting adjustable rate mortgages, while forcing banks to clearly show all of the conditions of the mortgage as well as the risks of adjustable rate loans to their customers.
The foreclosure crisis can also be alleviated by abolishing the practice of selling and trading mortgages between banks. When banks are allowed to trade mortgages and use them as leverage the banks no longer have a direct interest in the homeowners. If the bank no longer owns the mortgage, then they have no incentive to ensure that the borrower can afford to pay the interest rates that they charge. By outlawing the dealing of mortgages and other...

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